SOX Section 404 and Corporate Innovation

Huasheng Gao and Jin Zhang

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 2, 759-787

Abstract: This paper exploits a quasi-natural experiment to investigate the relation between the Sarbanes–Oxley Act (SOX) of 2002 and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imparts real costs to the economy by decreasing corporate innovativeness.

Date: 2019
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